Has PetSmart Growth Finally Peaked? Amazon, Valuation, Margins All Up For Grabs

People will spend endless dollars on their pets in good times and in bad times. PetSmart, Inc. (NASDAQ: PETM) has been proof of that, and its rival PetCo was acquired by private equity firms in 2006 for about $1.7 to $1.8 billion. PetSmart, Inc. (NASDAQ: PETM) is now worth almost $7 billion and that is after a large drop on Monday. That is also a gain of close to 300% in its shares from the bottom of the panic selling during the recession.

An analyst downgrade from Nomura is helping to put added pressure on a stock which was already reaching high valuation concern levels. Nomura lowered PetSmart to Reduce from Neutral and lowered its target to $55 from $72. The firm believes that the company’s key advantages may erode online.

The firm noted that Amazon.com Inc. (NASDAQ: AMZN) has lowered its consumer shipping costs by about 10% and that will lower its breakeven point against PetSmart, PetCo and others. Nomura also noted along with valuation that PetSmart’s margin expansion is likely to slow ahead.

PetSmart is down by 8.6% at $63.95 and its 52-week trading range is $52.82 to $72.75. Thomson Reuters has its consensus earnings estimates at $3.52 per share for Jan-2013 and $3.93 per share for Jan-2014. After today’s drop in the stock, this is 18-times current earnings and more than 16-times expected earnings for the year ahead.